Financial crime continues to grow ever more sophisticated.
The United Nations Office on Drugs and Crime estimates $0.8 – 2.0 trillion is laundered each year, which is roughly 2-5% of global GDP. Europol has conducted a detailed analysis across Europe and believes that only around 10% of the suspicious transaction reports (STRs) or suspicious activity reports (SARs) generated annually, lead to further investigation by competent authorities. Europol further estimates that barely 1% of criminal proceeds in the European Union are ultimately confiscated or stopped.
Northern “Red” Lights
Financial institutions in the Nordic region have recently made headlines concerning a series of significant money laundering lapses, which surfaced as a result of the publication of the Berlingske Report.
News stories on this topic have focused on fines but, in the background, firms are making organisational changes, shifting mind-sets and enhancing their systems and processes for the better. However, given how flawed the existing systems are alleged to be, there is still work to be done. As a result, specialists in financial crime compliance in the Nordics have never been in such high demand.
No Longer a Safe Haven
Accuity, in association with ACAMS Nordic Chapter, recently held a forum in Stockholm to discuss the challenges these institutions are facing. During the session, employees from financial institutions questioned, even in light of the fines, the need for such stringent financial crime requirements in the region, especially considering the Nordics’ reputation for being a safe and easy place to live and do business.
This question highlighted a longstanding and potentially problematic view of the region as a safe haven, immune from criminal activity. The reputation may be founded on truth, but there should be further considerations; namely, that a region considered ‘safe’ by inhabitants and businesses is often seen as a ‘soft touch’ in the eye of fraudsters and money launderers.
No one is immune and perceived safer regions may actually be more vulnerable. All banks and designated non-financial businesses and professions (DNFBPs), regardless of perceptions or culture, have a responsibility to implement robust financial crime defences.
Similar logic applies for smaller institutions that may feel their larger counterparts should shoulder a greater responsibility for preventing financial crime. Fraudsters and money launderers might see small firms as an easier avenue for criminal activities, as they may not have the same focus, skills, resources, and maturity. This makes it incredibly important for all businesses – big and small – to have robust processes and the right tools in place.
Is Domestic Payments Screening Necessary?
The forum also queried the validity of domestic payment screening. Since it is not mandatory across the Nordics or the rest of Europe, is the screening of transactions that do not cross borders necessary?
Such a way of thinking is understandable; why bother with something not required by law? However, given the growing issue of financial crime in the region, and the increased focus from governments and regulators to stamp it out, it would be incredibly short-sighted to think that domestic screening will not be required in the future.
Financial institutions might be reluctant to take on additional screening due to the huge increase in the volumes of data that this would entail, therefore requiring greater investment in compliance resources.
The cost of compliance is not an insignificant issue. In a global survey on the challenges of KYC conducted by Accuity in 2018, 76% of respondents named the rising costs of compliance to meet regulatory requirements as a major challenge.
In many cases, compliance costs far outweigh the fines incurred through a breach of regulation. However, this does not take into consideration the reputational impact of non-compliance, which can ultimately influence an organisation’s bottom line.
That is why AI and other emerging technologies are needed to help replace some of the manual work effort involved in the financial crime compliance process – particularly if domestic payments screening becomes the norm. Such advances in technology will make it far more manageable for organisations to manage high screening volumes with speed and accuracy, as well as significantly improving efficiency and lowering costs.
As Easy as KYC
Discussions also focused on the rise of Know Your Customer (KYC) systems and their use across the region.
Representatives from banks recognised the value of KYC in helping solve financial crime compliance problems from the start of a client engagement, but listed the cost, time, and effort required to implement them as major challenges. They also expressed a concern around over-reliance on a single source of information and the scale of the task. The biggest concern was how and where to start.
For banks in the Nordic region, KYC should not be viewed as an obstacle, but as an opportunity.
They need to openly collaborate with peers from across the financial and corporate sectors, learn from other countries where more successful systems are in place, and, most importantly, remove the risk of incurring further fines and reputational damage.
Whether the financial crime compliance industry needs an evolution or a revolution, technology innovation and collaboration will be a major step forward in improving the region’s financial crime compliance competence.
With financial crime more prevalent than ever, it is crucial that companies and governments all around the world deploy anti-money laundering policies and controls that prevent the flow of illicit funds.
The Nordic region’s recent experiences highlight some of the failures that can occur when such policies and principles are not embedded in the culture of a country or organisation.
The rest of the world should take notice.
To learn more:
Accuity is hosting a Stockholm conference ‘Raising the bar for KYC in The Nordics’, featuring a range of industry experts. The half-day conference is free to attend and will discuss the current landscape, the challenges organisations are facing, and the future of KYC.